A fuzzy multi-objective approach for sustainable investments

• Published in: Expert systems with applications 2012-09, Vol.39 (12), p.10904-10915
• Main Authors: Bilbao-Terol, Amelia, Arenas-Parra, Mar, Cañal-Fernández, Verónica
• Format: Article
• Language: English
• Subjects: Criteria; Decision making; Fuzzy; Fuzzy decision making; Fuzzy logic; Fuzzy robust portfolio; Fuzzy set theory; Goal programming; Investments; Socially responsible investment; Tracking error
• ISSN: 0957-4174; 1873-6793
• DOI: 10.1016/j.eswa.2012.03.034

► Investment portfolio construction considering both financial and ethical criteria. ► A strategy of tracking error is proposed for the financial criteria of the portfolio. ► Fuzzy Goal Programming is handled by fuzzy robust approach in order to construct the model. This paper develops models for selecting portfolios for conventional and socially responsible investment (SRI) mutual funds according to the preferences of the SRI investor. This involves constructing an investment portfolio that takes into account both financial and social, environmental and ethical (SEE) criteria. The optimal portfolio selection problem is solved when the expected returns of the assets as well as the periodic returns are not precisely known. Instead, incomplete information on the parameters of the model is modeled by fuzzy numbers, which include the ‘true’ values and are consistent with the Decision Maker’s beliefs on assets’ performance. In this paper, the financial criteria taken into account are the expected return and the difference between the returns of the portfolio and a pre-specified benchmark index i.e. a strategy of tracking error (TE) is followed. Moreover, we assume that the investor’s preferences about SEE features of the portfolio are imprecisely known. In order to model these flexible preferences we propose to use fuzzy decision making. The multidimensional nature of the problem leads us to work with techniques of multiple criteria decision making (MCDM), namely goal programming (GP), and the incomplete information is handled by a fuzzy robust approach. The proposed fuzzy goal programming (FGP) model is applied to a database of UK mutual funds.